10 things to watch out for when... Your fund closes down

It happens: Investment professionals will tell you that mutual funds are long-term investment vehicles and your money should stay where it is for three to five years before you start to see real benefits. A sound theory, but unfortunately funds do close - especially in a difficult operating environment.

Size: One reason for closing is if the fund assets under management drop below a level making it uneconomical to manage. According to the Hong Kong Investment Funds Association, if a fund gets too small it may not be able to achieve adequate diversification, or its expenses - everything from the cost of sending out annual reports - may take too much of the investors' capital.

Outcome: If a fund closes for this reason, it will usually be liquidated and investors paid out according to the current price of their holdings. If possible, investors should be offered an alternative fund in the manager's portfolio.

Notice: The fund manager is obliged to give notice of a decision to terminate a fund - usually three months but this can be shorter.

Business strategy: Closing a fund may be the result of a business decision by the management company. An extraordinary general meeting (EGM) should be called to consider the issue.

EGMs: Investors should be notified by circular if an EGM is called, giving reasons for the fund termination and giving terms, conditions and effective dates, says the HKIFA. Shutting a fund can usually go ahead only if the resolution is passed by 75 per cent of voters.